Regulatory Black Hole Puts Banks Off Deals

Regulatory uncertainty is
putting large banks off buying the assets of smaller rivals,
complicating the sector's restructuring and giving hedge funds
and private equity a golden opportunity to swoop in.

Regulatory uncertainty is
putting large banks off buying the assets of smaller rivals,
complicating the sector's restructuring and giving hedge funds
and private equity a golden opportunity to swoop in.

Banks are facing a regulatory crackdown in the wake of the
financial crisis, with national regulators increasingly opting
to go it alone with stricter rules, creating confusion for
lenders trying to calculate the merits of buying a rival's
assets and for fund managers running the slide rule over bank
stocks.

"The regulatory environment is such that you are seeing
increasing capital standards for banks, but we don't know yet
where they are going to," said Niall Gallagher, manager of the
GAM Star Continental Europe Equity fund.

"There's a lot of investor angst out there at the moment,
and unless you have a crystal clear view, it is very hard to
invest in these stocks."

Despite hundreds of billions of euros' worth of loans for
sale in Europe, senior bankers complain that they can't get some
deals past their credit committees because there is uncertainty
over how much capital they would need to hold after the
acquisition.

"We are looking at assets. But the regulatory uncertainty is
making us wary," said one senior U.S. banker.

With investors reluctant to plough more money into bank
shares, lenders are under huge pressure to shrink their bloated
loan books - by running them down or selling them - to meet
tougher capital requirements.

Europe's banks, including Royal Bank of Scotland,
Lloyds, Commerzbank and others in Ireland,
France, Spain and beyond, have shed hundreds of billions of
euros since 2008 but still have further to go than their U.S.
rivals because they grew so much during the boom.

The IMF has estimated banks will shrink by $2.8 trillion,
but in an extreme scenario that could reach $4.5 trillion as
firms rid themselves of unwanted loans and "rightsize" for a
lower growth environment.

With their loan books still bloated, European banks are
capping new lending to shore up capital.

Weak credit growth has already hit the European economy
hard, with the IMF warning earlier this year that deleveraging
would squeeze credit availability in the euro area by 1.7
percent over the next two years.

PricewaterhouseCoopers (PwC) has estimated that European
banks have more than 2.5 trillion euros of non-core loans, or
about 6 percent of their assets. It has estimated about 500
billion euros of those loans will trade in the next decade.

Banks are only four years into what is expected to be a
10-year process of cutting assets. Next year could surpass 2012
as the peak for asset sales.

Richard Thompson, European portfolio advisory group partner
at PwC, expects a record 60 billion euros of loans will be sold
next year up from an estimated 50 billion this year and 36
billion euros in 2011.

"It's the opportunity to acquire customers at a relatively
cheap price. Some banks will emerge as buyers when they see
assets at relatively competitive prices. But a lot of banks are
being very cautious on capital," said Thompson.